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The Stingy News Quarterly (Q1/2013)
New @ StingyInvestor 6 Graham Stocks for 2013 "If you had bought equal dollar amounts of the Graham stocks and replaced them with the new crop of stocks each year, you would have gained 681% (19% annualized) over the full period." Retirement 100 (Fall 2012) "Like avid gardeners, conservative investors want their stock dividends to grow. They aren't in it for a quick trade and, instead, follow a slower steadier method that requires only a little weeding and pruning from time to time. It's an approach that has allowed more than a few investors to enjoy a comfortable retirement." What would Buffett buy? "Warren Buffett is one of the best investors of our age and his extraordinary record spans many decades. Such is his renown as both an investor and businessman that even presidents seek his advice on economic matters. But Buffett isn't shy about sharing the factors behind his investment success." Why quality can be a drag "Value investors have it easy. A far bigger challenge is making money with quality stocks." Big U.S. banks on 3-for-1 sale "Two-for-one sales can inspire mixed feelings in the aisles of the grocery store. While I love big discounts, I have a hard time accommodating an extra bag of potato chips. But I never get my fill of bargain stocks and the market is now offering a rare three-for-one deal on U.S. bank stocks." Make headlines with media-shy stocks "If anything, the media spotlight seems to hurt stock returns, according to Lily Fang and Joel Peress in an award-winning 2009 Journal of Finance study." The search for balance "Even low-fee tax-optimized balanced portfolios face difficulties today because the yield on Canadian bonds is very low. To get a real return of 5 per cent on an equally mixed stock and bond portfolio you'd need to see stocks gain more than 9 per cent a year, which seems unlikely at this point. Because most people wind up in reasonably balanced portfolios, it's more critical than ever to avoid high fees. Unless, of course, they're keen on the Freedom 75 plan." Jolt from the blue "When you're enjoying your cup of coffee this weekend, download a copy of Francis Chou's annual report. It'll help you to become a better investor." Put cheapness first "EBIT/EV alone outperformed the magic formula's combination of ratios. Investors would have been better off simply looking for cheap stocks and not paying any attention to quality." Tetanus for Tim? "Spartan accommodations are one reason I became interested in a stock owned by money manager Tim McElvaine. He quipped that he felt the need to get a tetanus shot before visiting the aging headquarters of the company" The power of investor checklists "Developing a good checklist is well worth the effort and it can save you from running aground when using stock screens. Both work well together and they allow investors to follow a consistent, well reasoned, and systematic approach. If checklists can improve the results of pilots and surgeons, they should also be able to help you become a better investor." Why Apple investors should remember Nortel "Thankfully, most giant companies don.t implode quite as spectacularly as Nortel, but the stocks with the biggest market capitalizations tend to disappoint shareholders nonetheless." The perils of picking stocks "There are strange things done in the midnight sun by the men who moil for gold. Stranger still than the events in Robert Service's poem are the sights to be seen when screening for stocks. They might not be as bloodcurdling as witnessing the cremation of Sam McGee, but simple stock screens can lead you to infernal stocks." Investors shortchanged by Dell "In this case, the takeover price of $13.65 per share is rather parsimonious. Indeed, it has raised the ire of the smart folk at Southeastern Asset Management who believe Dell is worth much more. Their reasoning is worth reading because it shows, at least in part, how they go about valuing stocks." How much does that indexed portfolio cost? "If you need advice on building your portfolio, indexing may not be your best option" Advice to the lazy investor: Be even lazier "A peculiar investment trust put the buy-and-hold experiment into practice many years ago. The trust takes passivity to such an extreme that it makes many index investors look like a bunch of drunken day-traders." Asset Mixer Update We've updated our Asset Mixer to include nominal data for 2012. Periodic Table Update We've updated our periodic table of annual returns for Canadians to include nominal data for 2012. The Best of Stingy Links Stingy Links: Academia The gross profitability premium "Profitability, measured by gross profits-to-assets, has roughly the same power as book-to-market predicting the cross-section of average returns. Profitable firms generate significantly higher returns than unprofitable firms, despite having significantly higher valuation ratios. Controlling for profitability also dramatically increases the performance of value strategies, especially among the largest, most liquid stocks" Are leveraged ETFs the new portfolio insurers? "This paper studies Leveraged and Inverse Exchange Traded Funds (LETFs) from a financial stability perspective and emphasizes their similarities with portfolio insurers of the 1980s. Mechanical positive-feedback rebalancing of LETFs resembles the portfolio insurance strategies, which contributed to the stock market crash of October 19, 1987 (Brady Report, 1988). I show that a 1% increase in broad stock-market indexes induces LETFs to originate rebalancing flows equivalent to $1.04 billion worth of stock. Price-insensitive rebalancing of LETFs results in price reaction and extra volatility in underlying stocks. Although LETFs are not as large as portfolio insurers of the 1980s and have not been proven to disrupt stock market activity, implied price impact calculations suggest that their effect could reach a tipping point after a large market move in periods of high volatility." Stingy Links: Behaviour Trust & growth "Trust is core to all economic activity. You only want to act if you think you will not be cheated. Poor societies are often characterized by a lack of trust, which hampers exchange, and hampers credit as well. To the degree that you doubt that you will be rewarded for the fruits of your labor, you will face frictional costs in doing business, and you might reduce your business in areas that don.t seem to be worth the risk." We aren't the world "It is not just our Western habits and cultural preferences that are different from the rest of the world, it appears. The very way we think about ourselves and others - and even the way we perceive reality - makes us distinct from other humans on the planet, not to mention from the vast majority of our ancestors. Among Westerners, the data showed that Americans were often the most unusual, leading the researchers to conclude that 'American participants are exceptional even within the unusual population of Westerners - outliers among outliers.' Given the data, they concluded that social scientists could not possibly have picked a worse population from which to draw broad generalizations. Researchers had been doing the equivalent of studying penguins while believing that they were learning insights applicable to all birds." Would the real Peter and Paul please stand up? "But we must also understand that exchange is only possible to the extent that people trust each other: when eating in a restaurant we trust the chef not to put things in our food; when hiring a builder we trust him to build a wall which won.t fall down; when we book a fl ight we entrust our lives and the lives of our families to complete strangers. Trust is social bonding and societies without it are stalked by social unrest, upheaval or even war. Distrust is a brake on prosperity, because distrust is a brake on exchange." David Brooks on The Social Animal "In a lecture entitled How Success Happens, New York Times columnist and author, David Brooks, draws from the research in his latest book The Social Animal" Stingy Links: Bonds Howard Marks on Bonds "These are unhappy times for bond investors according to Howard Marks." High yield market is out of control "I find it interesting: Many many people realize the market is heavily overvalued in terms of compensation of return versus risk, but they still are buying." Stingy Links: Brokers Wall Street hates you "Don't buy what someone wants to sell you. Buy what you have researched." Stingy Links: Buffett Buffett's annual letter "wishing makes dreams come true only in Disney movies; it's poison in business." Stingy Links: Debt World is right to worry about US debt "The world's overwhelming presumption is that Americans will find a path to budget sustainability. Nevertheless, it is hard for many in the US to escape the nagging feeling that just maybe this time we won't. With more than $5tn of US Treasury debt, and memories of the huge inflation of the 1970s and default on gold clauses in the 1930s, foreigners would be right to worry a little." Stingy Links: Economy Financial stress index back down "According to yesterday's press release, the Kansas City Financial Stress Index (KCFSI) for the month of February continues to indicate that financial stress in the U.S. financial system remains low. The KCFSI fell to -0.61 in February, the lowest reading since June 2007, well before the Great Recession and financial crisis" Deposit insurance may increase bank risk "The argument for deposit insurance is that banks are inherently unstable, by virtue of their economic function they borrow money in the form of deposits (which can be instantly withdrawn) and lend to businesses on a longer-term basis. They are thus vulnerable to destabilising and self-fulfilling bank runs. But the counter-argument is that of moral hazard depositors have no incentive to choose between banks on grounds of riskiness, and bank executives can take risks knowing that they are underwritten by the insurance scheme." Stingy Links: Education Teaching college students about finance "I would revise the concept of the cost of capital to make it credit-centric. All the efforts to calculate the cost of equity capital from equity market correlations are bogus. They don't make any economic sense. In most cases, the cost of equity should not exceed the yield on an average CCC bond." Stingy Links: Fun New cough medication "It's a suppressant. Sometimes." Stingy Links: Government How not to run a pension fund "I love alternative investments. I love Wall Street. I don't mind paying fees. But I want returns." The real fiscal problem "Why it's not repaying the swelling national debt that necessarily by itself creates a problem for the U.S. economy; rather it's the government's increasing spending on unproductive programs in the first place, financed with increasing levels of national debt, that creates the real problem for the economy." We are the 98 percent "The only way to finance a big European-style state is to have it paid for by massive taxation of everyone, mostly the middle class. Right now, we are avoiding honest debate on this fact." Stingy Links: Graham Legacy of Benjamin Graham "Legacy of Benjamin Graham: The Original Adjunct Professor." Examining Benjamin Graham's record "The evidence suggests that Graham's simplified approach to value investment continues to outperform the market." Stingy Links: Hallett Regulators should ban this leveraging strategy "A while ago, I was asked by a regulator to speak to its enforcement staff about T-series mutual funds, which pay investors generous monthly cash distributions. The regulator wanted an independent view on product mechanics, common uses and risks, and was particularly interested in my thoughts on leveraging. I happily obliged, ending my talk with a firm recommendation: If I were the chief compliance officer of a dealer, I would not allow any T-series fund sales that involved: borrowing to invest in funds that have a policy to pay distributions exceeding pure yield taking the mostly 'return of capital' (RoC) distribution in cash and using that cash to pay down the loan. Here's my reasoning" Biggest controversy with commissions "Type the phrase 'financial advisor commissions' into Google and the results will be less than flattering to the financial advice industry. Understandably, regulators and the media are focused on full service brokers or financial advisors when this issue arises. But there is a good reason for both parties to cast their eyes on another closet door concealing a well-kept secret." Try some disciplined rebalancing "After considerable discussion and research a few years ago, our firm settled on a +/- 20% method whereby we invest clients at target allocations, and allow their allocations to each chosen manager to drift up or down by 20% of the target." Stingy Links: Health Is sitting like smoking? "As we work, we sit more than we do anything else. We're averaging 9.3 hours a day, compared to 7.7 hours of sleeping. Sitting is so prevalent and so pervasive that we don't even question how much we're doing it. And, everyone else is doing it also, so it doesn't even occur to us that it's not okay. In that way, I've come to see that sitting is the smoking of our generation." Big Med "Restaurant chains have managed to combine quality control, cost control, and innovation. Can health care?" Stingy Links: Market Buffett and Hussman on the market "My point is that there are a variety of highly predictive, methodologically distinct measures of market-level valuation (I used the Shiller PE and Tobin's q, but GNP or GDP-to-total market capitalization below work equally as well) that point to overvaluation." Stingy Links: Markets The uncertainty of market returns "The dawn of a new year gives birth to a plethora of predictions. Stock market prognostications are entertaining, but they should taken with a big grain of salt." The winners curse "Our previous studies suggested that top dog status is of no advantage in the United States; indeed, it's often something of a curse. As we globalize this study, the results confirm the global relevance of "too big to succeed." In the G-8 test of developed economies, we find the same phenomenon in each and every market: a statistically significant performance shortfall for top companies, relative both to the companies' sectors and the stock market as a whole, with no countries immune to the effect." Most large acquisitions are errors "One use of free cash flow is acquisitions. Companies that focus on small acquisitions and organic growth use free cash flow wisely. Large acquisitions overpay to buy a trophy asset that the acquirer may unintentionally destroy. Avoid such acquisitive companies. The company may grow, but the stock price likely will not." Beware of the bias "The sponsors of American corporate-pension plans still expect 7.6% nominal returns from their portfolios, and fund their schemes accordingly. But given the plans' allocation of assets to low-yielding bonds, such targets imply a nominal return of 12.5% from equities, or 10% after inflation. That is way above the historical experience of stockmarket returns. Congress has relieved the pressure on pension-plan funding by allowing companies to fiddle with the discount rate so as to make their liabilities look smaller. But as Mr Marsh remarks, this approach is akin to a homeowner who, upon hearing of the approach of a hurricane, decides not to board up his house but to smash his barometer." Mindful of bubbles in a boom for deals "Thomson Reuters reports that during the first two months of 2013 there have been over a thousand deals valued at almost $163 billion in total. That's more than double the amount for the same months in 2012. If this blistering pace continues, merger and buyout deals could surpass $2 trillion in 2013, far more than the $1.57 trillion in 2007." Earthquakes and the markets "Like the devastating Japanese earthquake of 2011, the stock market crash of Oct. 19, 1987, came as a total shock to most people. Yet the crash wasn.t entirely without warning. Five days before, the Dow Jones Industrial Average dropped 95 points, which was then an all-time record. Two days later, it closed down another 108 points. Just like others crashes -- 1929, for example -- and all major earthquakes, the 1987 crash was preceded by significant rumblings." What risk premium? "I disagree with most mainline thinking on this issue in that I believe the risk premium is much lower than is commonly believed. Most academics think it's around 5% or so. I think the long-run premium is probably about 2%. Eric Falkenstein thinks it doesn't exist at all." Stingy Links: Momentum Momentum investing shouldn't work But it does work, prompting Eugene Fama to describe it as 'the premier anomaly'" Absolute momentum "There is a considerable body of research on relative strength price momentum but relatively little on absolute, time series momentum. In this paper, we explore the practical side of absolute momentum. We first explore its sole parameter - the formation, or look back, period. We then examine the reward, risk, and correlation characteristics of absolute momentum applied to stocks, bonds, and real assets. We finally apply absolute momentum to a 60-40 stock/bond portfolio and a simple risk parity portfolio. We show that absolute momentum can effectively identify regime change and add significant value as an easy to implement, rule-based approach with many potential uses as both a stand- alone program and trend following overlay." Stingy Links: Munger The Psychology of Human Misjudgement "Audio of the often referred to speech by Charlie Munger on the psychology of human misjudgement given to an audience at Harvard University circa Jun 1995." Stingy Links: Real Estate A new housing boom? "After the traumatic collapse of the last price bubble, Americans seem less sanguine about owning versus renting. According to the Census Bureau, the homeownership rate has been falling, from 69.0 percent in the third quarter of 2006 to 65.5 percent in the third quarter last year." Shiller on housing "Robert Shiller, a professor at Yale University and co-creator of the S&P/Case-Shiller index of property values, talks about the outlook for the U.S. housing market." We're number 1 "Canada has a new worthwhile initiative. After years of booming prices, that bastion of politeness north of the border is looking to avoid a catastrophic housing bust for something more, well, boring. Initiatives don't get more worthwhile, and perhaps not more difficult considering Canada just might have the biggest housing bubble in the world right now." Stingy Links: Retirement Retirement is cheaper than you think "The Statistics Canada Survey of Household Spending for 2010 found senior couples on average spent a combined $53,100 a year (including money paid to income tax). From looking at that figure as well as talking to seniors and their advisers, I estimate that a retirement lifestyle that you might call middle class or a bit better costs about $40,000 to $70,000 per couple (also including income tax payments)." Small towns can offer big savings "Studies have shown that a majority of Canadians have thought about where they want to retire but only a small portion would actually leave the country. Some appear to be moving to smaller communities, according to 2011 census data which shows the population of people 65 and over growing in small towns." Stingy Links: Stocks Aswath Damodaran compiles global stock data "For the last two decades, I have dedicated the first two weeks of each new year to a ritual. I obtain/collect/download data on all publicly traded companies listed globally, using a variety of data sources, and then analyze and present the data, aggregated at a number of different levels: by country, by region (US, Europe, Emerging Markets, Japan, Australia and Canada) and by industry. I report on measures of operations (profit margins, turnover ratios, working capital), measures of leverage (debt ratios), measures of risk (beta, standard deviation, equity risk premiums, country risk premiums) and pricing measures (earnings multiples, book value multiples, revenue multiples). I just completed my 2013 update and you can find it by clicking here." Stingy Links: Thrift The future of shopping "How long can brick-and-mortar retailers afford to operate stores that serve as display cases for someone else? More importantly, will that be long enough to transform themselves into something less vulnerable to Internet competition?" Teach Americans to be cheap "The most potent way to get more wealth to the poor and middle-class is to get these people to save more of their income, and to invest in assets with higher average rates of return." The 'scrooge' who begat plenty "Perseverance, property rights, contracts, civility to one's opponents, silence, smaller government, trust, certainty, restraint, respect for faith, federalism, economy, and thrift: these Coolidge ideals intrigue us today as well. After all, many citizens today do feel cursed by debt, their own or their government's. Knowing the details of his life may well help Americans now turn a curse to a blessing or, at the very least, find the heart to continue their own persevering." Stingy Links: Value Investing Net-nets are not for faint of heart "Strategy Lab contributor Norman Rothery recently tackled an issue that's important for those investors who rely on screens to identify attractive stocks. Should you buy all of the stocks that pass your screen, or simply view them as prospects, which require additional analysis before you sort out winners from losers?" Chou's 2012 letter "In general, we are not that bullish on the stock market. Aside from a couple of industries like the financial institutions in the U.S. and companies in the retail sector, we are not that comfortable with the prices of many stocks." The best stock-picker "By buying companies with safe, high dividend yields, Norman assured himself of getting only companies that had solid financial characteristics (after all, they couldn't have been paying dividends for many years without a good underlying business model and strong cash flow), at prices that were usually - in hindsight - ridiculously cheap, because Norman generally bought them during a hysteria that was causing Mr. Market to offer that particular stock at a particularly attractive price." Fishing for value "There are generally three scenarios under which they buy into a company - it's ignored by Wall Street, is misunderstood by investors, or has suffered from panic selling." Mohnish Pabrai interview "I don't invest in technology stocks because I understand it. Basically, Buffett would say that he doesn't invest in tech businesses because they are subject to change. Industries with rapid change are the enemy of the investor. Tech businesses, particularly biotech, is a problem from that point of view. All industries work with change but you should ideally be investing in businesses with a low rate of change, not a high rate of change." Tough times for classic value investors "While the U.S. equity market has performed exceptionally well since its bottom in March 2009, Warren Buffett's Berkshire Hathaway has trailed the index by nearly 6%. Buffett is among a number of prominent classic-value investors who have fared poorly over this period. Over long time horizons, value investing has consistently outperformed growth strategies and the broad market index. So what is causing this recent phenomenon?" Francis Chou on value "What keeps you awake at night? I worry if my valuations are wrong. If they are wrong, then you don't make money. I am looking for something that I believe is worth 100 cents, but which I can buy for 50 or 60 cents. But is my 100 cents accurate? Did I miss something? Is the earning power there? Are the assets really worth what they're saying? And is management honourable, or will they run off with the money?" Stingy Links: World Chavez was bad for Venezuela "Politically, what Chavez did was successful. But that success came at the cost of the future. Instead of building a more stable foundation for long-term prosperity, Chavez started cutting chunks out of the house and handing them out to the crowd. Socialists, especially, take note: he essentially destroyed one of the most competent, successful, state run companies in the world. Thirty years from now, that--and not the transitory social programs that were thereby funded--will be his real legacy to Venezuela." National balance sheets "But Morgan Stanley reckons the shortfalls are so large (between 800% and 1,000% of GDP in the US and UK) that the situation is hopeless. In effect, the public sector must impose a burden on the private sector but the only question is how." Unfair, short-sighted and self-defeating "The logic behind both of these reform initiatives is that bank deposits have two, contradictory properties. They are both sticky, because they are insured; and they are flighty, because they can be pulled instantly. So deposits are a good source of funding provided they never run. The Cyprus bail-out makes this confidence trick harder to pull off." Hugo Chavez: Good timing, not good leadership "Chavez was not a dictator, exactly. Like Vladimir Putin in Russia, Chavez could claim genuine support. Also like Vladimir Putin, Chavez carefully controlled the country's institutions - courts, media, bureaucracy - to ensure his rule. Chavez mimicked Putin in one final way: His power ultimately rested on his control of his nation's oil." Cyprus details heavy losses for bank customers "Major depositors in Cyprus's biggest bank will lose around 60 percent of savings over 100,000 euros, its central bank confirmed on Saturday, sharpening the terms of a bailout that has shaken European banks" Fewer, richer, greener "The world has been going to hell in a handbasket for as long as anyone can remember, but it never quite seems to get there. In fact, according to just about any objective measure you choose, the health and wealth of the human race has been improving rapidly and almost continuously for at least the last 200 years." | ||||
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